Very few businesses can last long enough without access to any form of credit, at a point in their lifetime. For those that have already taken a loan before, you probably know that the first loan is the hardest to get. Most bankers prefer dealing with borrowers with credit history, i.e. that have already borrowed at least once in their life, and have at least paid back in full, and on time.
Remember that bankers are not venture capitalists who can make riskier loans. They are also not like angel investors, who invest for a cause other than making money. On the contrary, banks prefer lending to the low risk, low-profit ventures, instead of businesses with no record, or high-risk startups altogether. Banks tend to allude to risk factors as well as increased costs of servicing the small accounts as the primary reason for limiting their exposure to small businesses.
Nonetheless, it can still be done. Here are 5 ways through which you can improve your chances of obtaining a bank loan:
1- Get a bank that’s Familiar with your Industry
As part of their businesses, bank need to make loans. This is the main reason why they stay in business in the first place. But to increase your chances of success, you need to look for a bank that has done business with companies like yours, or is at least familiar with your industry. It’s also better to seek out banks that are active in financing small businesses.
Keep in mind that some banks participate in government programs, such as SBA loans with guarantees and other loans, while other banks just lend via the conventional basis, where they lend without any form of government support.
2- Know the Common Loan Terminology
Knowing exactly what you’re looking for and the types of loans offered by your bank can help you make a better choice.
Terms Loans: Banks can offer loans ranging from $10,000 to $500,000 to finance the purchase of equipment, inventory, and other large ticket items. Such loans can be either secured with fixed rates, or unsecured with variable rates.
Commercial real estate mortgage: these are loans secured by real estate, and can be used to refinance, improve, or purchase investment or commercial properties. The loan amounts can range from anywhere between $25,000 to over $500,000
Secured loans: banks essentially provide loans for various purposes, including refinancing debt, improving cash flow, of financing the account receivables. In general, secured loans are easier to get, and some banks usually have fixed rate financing on these loans. Nonetheless, secured loans are mostly offered to established businesses that have a full financial documentation for at least 2 years. There is also the option of unsecured small business loans. These loans are supported by the businesses own creditworthiness, rather than a loan against a collateral. They are also known as personal loans or signature loans.
SBA-Guaranteed Loans: if you don’t qualify for standard loans, you don’t have to worry. SBA loans are ideal for small businesses and have been guaranteed by the federal government.
Vehicle loans: for those planning to purchase a vehicle for their business, banks can provide vehicle loans of up to 100% of the total purchase price of a used or new vehicle.
Lines of Credit: some banks can provide business credit for overdraft protection, which is a line of credit that ideally protects a business from checking its account up to a certain limit. Other banks can also offer credit cards for business.
Consult your banker and have them explain to you in detail about the various loan products they have for small businesses. Evaluate their products to determine which one is right for you, keeping in mind which ones are more likely to be approved. Remember that banks typically require evidence that you can repay the loan, including assets or collateral requirements deposited in that bank.
3- Always be Prepared
An entrepreneur is just like a boy scout; both are always prepared. As an entrepreneur, you should be more prepared when meeting your banker than a boy scout is in the woods. Show your banker that the loan is a low-risk proposition on your side, and have with you a completed loan application, financial statements projection of about 3 years, copies of cash flows, and a cover letter; plus an executive summary of the business plan.
4- Find out your Credit Score
One of the first things the lender will look at as they review a loan application is the credit scores of the applicant. It’s therefore crucial to know your score. FICO scores typically range from 300 to 850, and it can be a challenge for a business with scores less than 600 to obtain business credit from any financial institution.
5- Anticipate Tough Questions
Do you remember how you prepped for a job interview? In most cases, the interviewer probably never asked the questions you were dreading most. Instead, they caught you off guard and asked you something you hadn’t thought of. Loan applications can be similar to this in many respects. As such, be prepared to answer the truly tough, and aim to create the best impression. One study suggests that a thoroughly prepared and confident borrower will be 4 times more likely to have their loan approved compared to a borrower who doesn’t know the answer.
Be prepared to address questions like:
How much money do you need? In such a question, be as precise as possible. Of course, adding a few bucks extra for contingencies won’t hurt. How long will you need the money? Be ready to give a detailed explanation on how the money will be used, and why they should go with your idea.
What are you going to do with it? In most cases, businesses use loans to pay off old debts, buy new assets, or pay for some operating expenses. How long will you take to repay it? Preparing detailed cash flow projections can offer a concrete repayment period. Try to convince the lender of the long term profitability of your business, as well as your ability to repay their loan with a business plan and cash flow projections.
What will you use as collateral? Collateral is crucial when it comes to business lending, and you need to be aware what a collateral package looks like. Keep in mind that without collateral, the lender will solely rely on your existing cash flow and future performance in repaying the debt. This can translate into higher interest rates due to the higher risk.
6- Dress Professionally
Although this might come as a no brainer, some entrepreneurs tend to dress the way they wish, perhaps part of the reason being they are their own bosses. This can be fine for the young tech executives who like to slouch around in flipflops, hoodies, and rugged jeans. However, it won’t be good for a startup business meeting with a banker. You need to project the image of a professional that’s sober, and trustworthy; one that can be trusted with a loan. Check this article on men’s style guide for a reference.
7- Avoid Overstretching the Truth
Avoid using unsubstantiated, broad statements. Most lenders will easily check and find facts about your business. As such, if you can’t support any of your statements, simply don’t make them. Ensure that you can support everything you say with facts and figures. It’ll be best to keep any projections, collateral statements, and assets lists soles on the conversation side.